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Greg McBride

Here we go again

By Greg McBride · Bankrate.com
Tuesday, January 18, 2011
Posted: 4 pm ET

A couple of quotes jumped out during my weekend reading. The first comes from a front-page article in Saturday's Wall Street Journal about banks making more loans to consumers and businesses. It closes with a couple that "took out a home equity line of credit this month to help finance the purchase of a 4,000 square-foot, four-bedroom home in Indianapolis," with the borrower saying, "It gave us the flexibility we needed to get into a house that we couldn't have afforded if we didn't do that."

Good gravy! Have we not learned anything from the bursting of the credit bubble?

There is a difference between using low interest rates for savvy financing -- such as tapping home equity at low, tax-deductible rates for auto purchases or home improvements rather than liquidating other higher-returning investments -- and using low rates as a crutch of affordability. Based on the borrower's quote, I fear the latter, an all-too-common occurrence during the easy-credit boom days.

Why? For starters, a home equity line of credit and any other adjustable-rate product is poised to see higher interest rates over the coming years. Also, the minimum payment requirement on a HELOC is interest only. At some point in the future, these borrowers are likely to see not only higher rates, but also a payment that shifts from interest only to interest plus repayment of principal. In this economy, who can be assured their incomes will grow into the cost of the house?

The second quote comes from an article in my hometown Palm Beach Post about homeowners associations fighting back against residents delinquent on their association dues by doing things such as denying visitor access or pizza delivery, and most effectively, unhooking their cable TV connection that is paid for through HOA dues.

One measure mentioned was deactivating the transponder that opens the security gate, forcing delinquent residents to go through the visitor's lane when entering the community.

It quoted a resident who is, according to the article, "in foreclosure and with a $17,000 debt to the homeowner association, including late fees and attorney fees."

He asks,"Why do I have to wait to get to my house? That's my house. Nobody should get in the way of me getting there."

Note that he twice uses the phrase "my house." But if you're not paying the mortgage or homeowner fees and are in foreclosure, it's no longer your house, is it?

Similarly, I've seen too many articles where borrowers that bought with no money down and skated by on interest-only payments are referred to as "homeowners."

Exactly what part of that house do they own?

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